Credit Trends in Powersports Finance

Details on consumer demand and spending Insight into peripheral markets Navigating current originations trends Outlook on credit performance, patterns, and development [toggle title="TRANSCRIPT"] JJ Hornblass 00:00Everyone that after the conference, we're going to be sending you a an evaluation form. by email, I really want to encourage you to fill that out. We hold those evaluations in in with really high regard and really pour over them. So we want to hear from you ideas for how we can improve on power sports finance for next year and make it even better for you. It's now my pleasure to introduce Emma Sandler, who will moderate this next session. I am, joined royal media in in January as an associate editor and she writes for both power sports finance and auto finance news. Prior to royal media, she was an intern at Forbes, Chicago ino and Marie Claire. She is also a currently a contributor to Forbes life focusing on the intersection between science, technology and design. She has her bachelor's from the University of Massachusetts Amherst and a master's in journalism from from Northwestern University. And I'm very, very pleased to introduce her Please give her a warm welcome, Emma. 01:19 Can we shake hands or should we shake hands? 01:24 Good morning. 01:27 As it was mentioned, I joined in January of this year. So this is both my first powersports finance conference as well as the first time moderating and I'm very excited and honored to be sitting down with Bryan Landau, the Senior Vice President and automotive business lead at TransUnion. We were also supposed to be joined with Lula Costco, the automotive finance and dealer leader at Equifax. But he unfortunately has fallen ill. So we wish him a speedy recovery and also remind me One, two, please get your flu shot. Credit is an important factor in power sports finance, and understanding current credit trends and performance outlook is equally important, especially considering the emergence of new ways to mitigate fraud, alternative credit data and the significance of thin file applicants. With that said, and without further ado, I invite Brian of TransUnion to please come up and give his presentation. 02:38 Hello, can everyone hear me? Okay. 02:42 Thank you very much, Emma. Thank you, JJ, also, and Natalie, wherever you may be for inviting me to the powerbook Sports finance conference 2017 This is actually my first time attending the conference and I was here all day yesterday to listen to many of the sessions and it was a great experience for me just to learn so much. about what's going on the industry and try to draw parallels between power sports and auto. Here TransUnion, we spent a lot of time thinking about the automotive ecosystem, we work with a number of different banks and other lending institutions, dealers and intermediaries. But we don't spend a lot of time focusing on the power sports conference. And we feel that's an underserved market. Certainly one that we feel as many of you believe as well, that will grow over time and mature learning from the experiences from the bigger brother in order. So what I want to do today is go through a few slides before we actually have a q&a session. It says here, credit trends in power sports finance. What I will say is, there's a little bit of a caveat to that because from my standpoint, TransUnion standpoint, we don't have that much visibility into power sports. Not many of the lenders who focus on power sports report to us as power sports lenders. So even with the information we have, it's very difficult to glean a lot of interesting insights. So what I'm going to do is go through a few slides, and then try to draw some parallels from what I believe we can see from the auto finance industry, which is where we have a lot of information. 04:21 So, just a 04:25 little bit about the automotive industry in comparison to power sports. So as many of you know, you want to industry is very large. Pretty much everyone who is a licensed driver has a car today 255 million cars are on the road and registered, and that includes SUVs and light trucks. And last year, we had a record high of 17 and a half million new cars that were sold, that probably that number goes exceeds any number prior to it going back to probably about 2000 or 2008. So, you know, a 15 year high for the industry. Now let's compare it to power sports here, you know, and I just kind of looked at a few different segments within power sports motorcycles obviously being the largest piece, but power a personal watercraft and snowmobiles. And you can see that the numbers are much smaller, you're talking about roughly about 5% of vehicles that are registered in the US on the power sports relative to what you see in passenger vehicles. And the sales are also reflective of that too. You're talking hundreds of thousands versus millions 10s of millions. And in some cases like utvs and ATVs. There's not that much information out there because the regulations state to state are very different from a registration standpoint. So just kind of focusing on motorcycles, and comparing that to the auto industry over the last 10 years. So on the left side, what you see here is auto sales from In 2006, use that as a marker for the pre recession. And then 2016 for the post recession. And what you can see here, there was a 7% increase in unit sales, and that's new vehicle sales over that 10 year timeframe. So the industry has recovered and more so it's actually exceeded what we had pre recession. Now, if you look at motorcycle sales, and this comes from the motorcycle Industry Council, and it actually was from a Bloomberg article from a few months back sales are still 50% below what they were prior to the recession. Okay. And there are a number of reasons for that, which we'll talk about in the next slide. Okay, so the two obvious ones, it's the aging customer base. So you're seeing that, 06:47 sorry about that. 06:51 So you're seeing that in motorcycles in 2003 25% of the customer base made up of riders who were 50 or older. you fast forward about about 11 years later, you're seeing that number double now it's 50%. Okay. And that's why you're hearing or seeing articles about Harley Davidson and others talking about the next set of riders are going to have to come from a different generation. So in fact, I think Harley even said in one of their publications that they're looking at adding 2 million new riders over the next 10 years, and that's going to really come from money from the millennial generation. The other piece there is disposable personal income, which is, you know, a big driver of motorcycle spend. And what you're seeing here is that the DPI as a percent of transportation expense, and this comes from the Bureau of transportation statistics, so it's publicly available information has been dipping down. So transportation expense has been rising, and it's been eating away at this disposable personal income in the process. So, there are other things also to consider which is geography. Okay, so let's start out with the concentration of registered vehicles across the 50 states. The dark blue represents the percentage of total vehicles registered. that's greater than 5%. So you see that in California, Texas and Florida, okay, those are the big populous states, the light blue is somewhere between three to 5% of total concentration. And now as you see mostly Midwest in the southeast, so that's your reference point, because as we said before, 86 to 86% of of licensed drivers have a car today. So let's look at next one motorcycles. Okay, somewhat similar to what we see for passenger vehicles. You know, the only difference slightly is the fact that maybe fewer riders as a percent of total registration is found in Texas. You're also seeing interesting enough, you know, Wisconsin pop, maybe that has to do with the fact that Harley's backyard is in Wisconsin. And now let's go to public On watercraft and as a proxy, I used boat, recreational boats here because there really isn't that much information state by state on personal watercraft. And what you see here is now you're seeing a lot more dark blue in the, in the, in the Midwest where a lot of lakes are. So a lot of bodies of water out there. And, you know, this lets you understand that you're not going to get the nationwide coverage that you do in automotive right. So the dealer representation would have to reflect that right so geography and certainly weather have to take into have to be kept into account and in some deals, you know, certainly you know, mirrors to some extent watercraft, you're seeing in the in the Midwest and also in the northeast again, will you have you know, a great deal of accumulation of snowfall, the the shaded gray areas where you don't see any registered vehicles today, okay, for obvious reason, you just do below the snow belt. So just things to glean from this what are the key dependencies by by vehicle type So obviously, for passenger vehicles, it's highly dependent on GDP and unemployment rate, you know, the health of the economy and the fact that people actually are having jobs and need to go to and from work, right. So they're using a car and SUV as the primary means of transportation. So it's a necessity to them. You know, it also mirrors the population, right. So we always use as a reference point when we talk about the dealer coverage. And certainly, you're going to see more vehicles being used in the suburban areas outside those major cities. Okay, for motorcycles. It's certainly dependent on the health economy, wealth accumulation, and his personal disposable income are certainly key measures to think about and look at. But you also have to think about the terrain that you're dealing with open roads in warm weather conditions as well. And then for personal watercraft, as I kind of alluded to before, obviously has to deal with topology, right? You're dealing with large bodies of water and it's also a discretionary product, much like motorcycles, right? This is not their primary means of transportation. And again, snowmobiles, very similar to watercraft with the added twist the fact that you need, you know, some appreciable amount of snowfall. 11:15 So, 11:17 you know, let's now now that we've kind of talked about power sports, and specifically, motorcycles. Let's try to see we could find some parallels here. And this is just a summary of, you know, just what we all can read in the papers in journals and from our sports website. One thing that you're seeing a lot of is that in the automotive industry, and it kind of you can see parallels with motorcycles as well, is that there's a shift to smaller type vehicles from SUVs to the crossover utility vehicles, SUVs. Right. And that that process or that trend emerged about 10 years ago and it's been certainly growing, you know, and becoming more popular even with the luxury vehicles today. You know, then you have the OEMs, who are definitely Thinking about millennial the millennial generation are focusing on starter starter motorcycles, you know, with price points below 7000. Okay, so that's that's kind of the shift we're seeing from a manufacturing side. Use vehicle sales. You know, in auto, you know, the biggest driver of health was new new car sales, new vehicle sales. Now you're seeing that shift happening over to us vehicle sales for a number of reasons. One is that the pent up demand is no longer the different new vehicle sales incentives are an all time high. And, you know, a lot of lenders out there are particularly concerned about us vehicle values, right. And on top of that, if you look at the supply side of the equation, you're seeing a lot of of awfully vehicles coming back into the showrooms and dealer inventory is rising to, you know, record levels, and there's concern around that as well. So you're seeing a lot of finance companies shifting gears away from new vehicle sales, where they compete primarily with the captives. To use vehicle sales and some are actually trying to innovate as well by looking at used use vehicle leasing. Okay, so that's now being explored right now. And as we all know from the last day in this morning that you know, you're seeing that increased need for use vehicle financing in motorcycles right, especially with the drop off as we showed before, on numerous new motorcycle sales. You know, the man is going to be coming from Pre Owned vehicles pre on motorcycles, especially with millennials looking at that as their option and then leasing you know, leasing has been growing like gangbusters in auto over the last five to seven years. You know, it's it's reached Now, based on what Edmunds has, has said in their reports about 30% of new vehicle sales today, okay, so 13:51 it used to be your 13:54 vehicle leasing used to be a luxury play a marketing luxury play. It's now extending to the mass market. You're Seeing, you know, vehicles with lower price points now being offered with leasing options to get some of those mass market consumers to consider their purchase. Okay. And it's something that we're hearing that millennials are also very interested in because they they equate it to the payment of a mobile phone, some type of payment that they do in perpetuity, this is kind of no different. And in motorcycles, you know, you're seeing more and more of that demand right now for leasing. So, you know, again, another parallel that we're seeing, and then terms, you know, on the on the loan side, you know, to make the monthly payment, you know, more digestible for the consumer, because just like in motors, just like motorcycles, automotive is a place where you're seeing a lot of the younger consumers thinking about monthly payment. They're even thinking about shopping by payment, using that payment, as a reference point for what they can actually buy. So interest rates, you know, have been an all time low, slowly rising. But given the size of the asset relative to a home and a mortgage, you know, they're not going to necessarily move the needle that much with regards to the monthly payments. So term is really the big lever for a lot of finance companies. And that typically used to be 60 months, now you're seeing 72 and even 84. So we'll talk more about that in a little bit here. But that's, that's kind of been the big movement in auto as of late. And then, you know, the, from what I can see just from various articles, I've read that there's a lot more competition now in the last few years in motorcycles and power sports more generally. And you're seeing lenders doing what they can to offer, within reason, of course, more affordable monthly payments to their consumers. So, just took some data here to kind of show the comparison in terms of originations by wrist here, and we break Get out to five different risks. Here's from Super prime all the way down to subprime. And we actually use vantagescore 3.0 to score the population. So what you see here on the left is the risk distribution for auto. And what you see on the right is motorcycle. Now let me just preface this that as I said before, earlier, we don't have a great deal of visibility into the power sports industry because many lenders don't report as motorcycle or personal watercraft or anything of that nature. So it's very hard, very hard for us to segment the market in terms of originations balances and whatnot. But based on a sample analysis, looking at model lines, a large number of model lines we were able to glean what we can from the data and see that there are some slight differences when you look at the distribution between auto and motorcycles. There is maybe some surprise to some of you that you know, the sweet spot seems to be the prime and near Prime's play Just it's in this footnote there, but near prime is 6012663, based on band score, and prime is 661 to 720. So that seems to be the sweet spot. There seems to be a little bit more on the subprime versus auto. But that could be due to recent activities in the auto space, which I'll get into in just a little bit. Okay, so let's just talk a little bit about the auto trends, the auto finance trends, which is where we have a little bit more knowledge here at TransUnion. So, every quarter, we put together an industry insights report that shows kind of the health of the industry, and we do it by different segments of financial services. And this was just taken from the last quarters industry insights report. So what you see here is delinquency rate. It's 60 days past due as a percent of bars. And I use q2 2009 as a reference point as a peak over the last 12 to 15 years at 1.43% bars and you See that if you look at the the six bars that follow, there is that trend starting from q2 2012 to q2 2017, where you see that steady rise 31 basis points of increased delinquency rates. But the good news is that we still haven't reached that peak that we saw in 2009. Okay. So it just shows that the market is recalibrating right now. Perhaps they overshot with regards to subprime and are pulling back a little bit based on the performance they're seeing in their in their book. 18:34 Okay, so want to take a look at this on a regional basis. And I'll try to tie it back to Motorsports a little bit based on some of the maps we showed earlier. So what this shows is the top 10 states with the largest five year change in delinquency rates, okay. The average is about 31 basis points which we showed on the previous slide, from q1 q2 to I'm sorry, from 2012 to 2017. This shows that the top 10 had somewhere between 63 102 basis points of change. In delinquencies, and as you can see, most of that is down in the south in the Gulf Coast. Okay. And why is that? Well, a lot of that has to do with the fact that that's where the highest concentration of nonprime consumers are today. And that's what this right panels shows. So percent of consumers are borrowers that consists of nonprime. Very similar maps here, very similar heat maps. Now let's try to bring it back to the coverage or the distribution of vehicles that are registered under the power sports definition. Most of them as we said before, with the exception of motorcycle is pretty much in the northeast in the in the Great Lakes area. So it you're somewhat covered or protected a little bit from this phenomenon that we're seeing right now emerging trend, we're seeing an auto okay if that spills over to power sports. So that's that's the good news from that standpoint. So what is the industry doing more specifically, what are the auto lenders doing the space and this is the response Just from that uptick in delinquencies. So what you see here is two set of bars here. The dark blue represents the year over year change from q1 2015 to q1 2016. And the red bar shows one year later from q1 2016 to q1 2017. And this is the year over year growth in originations. And you can see how it's changed. As you look from Super prime on the left to subprime on the right, and you can see here that basically a lot of lenders are pulling back on subprime in your prime and to some extent prime originations, they're focusing a lot more of their attention on the super prime and prime plus areas right now. And what this means that you can see this on the far right, with the total, the total number of originations has dropped to 2.9% year over year, okay. Obviously, in fact, impacted by what we're seeing on the on the lower end of the spectrum. So my point earlier was that you know, the market is calibrating this is this is a perfect slide to show that okay? Now we'll say that, you know, certainly there are a number of different large lenders out there. And it's all public information that are pulling back on their various underwriting criteria. They're they're pulling back on extended terms getting away from 84 months, because of the risk associated that tied to the the underlying asset and the appreciation curve associated with that. They're reducing the loan to value ratio by asking for more money up front. And they're, you know, they're they're trying to direct customers consumers more to loans than to leases loans have less risk to them than leases do just because of the recovery process. But there are also other lenders that are going beyond just simply pulling back on various levers. They're also incorporating a lot of non traditional alternative data and using machine learning. I think one gentleman mentioned the Wall Street Journal article from a couple of weeks back about Ford Motor Company, particularly their capital financing arm using machine learning right now. alternative data to do more predictive analytics on their cost on their customer base. That's just one example of that. Okay, many others are doing it too. And with regards to non traditional slash alternative data, it's certainly comes in variety of forms, it's trended credit data, it's public records information. And it's all the alternative data that you don't necessarily see on a standard credit reports such as utility bills, and mobile phone payment bills, and things of that nature. And obviously, they're all trying to push the envelope on predictive modeling and machine learning. Okay, those two go hand in hand, the data and the analytics go hand in hand and that's really important for them to do a couple of things. One is to price better, okay to be more competitive the market to be to do more risk based pricing, and also to expand their buy box and be more comfortable in the subprime in your prime segments. And then, just in summary, you know, just to wrap it up here, as I said before, power For less than 5% of automotive based on registered vehicles that are out there in the market today, most of that is coming from motorcycles. No surprise to many of you. Although motorcycles have grown since the financial crisis, I'm sorry, they've grown since the financial crisis, they still have not reached their pre recession levels. So what can be what can we glean from the automotive industry to help bring back some of those sales that were lost over the last few years right certainly financing in in providing that access to credit is going to be important. 23:34 And then as we said before, motorcycles and to a large extent power sports are dependent on other variables that go beyond auto auto is utility. And most of the US population has a car today and need it needs it for basic purposes. Power sports, you know, is highly discretionary spend. So how do you make that you know, part of the conversation as you're as you're trying to bring in more consumers going forward and And I think as we said, You know, I saw many of you yesterday and listened to many of the sessions. You know, there's many things that we can glean from the automotive industry, some of you saying that your ministry is five to 10 years ahead of power sports. Well, I would say that that may be the case, I'm not sure myself, but what I will say is that, as I said earlier, automotive is very large 20 times a size a motorcycle. And that means that there are a lot more use cases, a lot more variables to consider a lot more, a lot more testing that one can can glean from the automotive industry that could be applicable to autos. So my my, my advice to everyone in the room is look at the auto industry as a way to test some of your ideas, right? use that as a testbed for innovation going forward. And then the last thing is around just the the dynamics that we're seeing right now in auto, and we can talk more about this during the QA, but you know, there is a pullback right now and then Prime segment, we think that it's going to be short term as the market calibrates itself. There are a lot of industry veterans in auto and have been through a number of different business cycles. So to them, this is probably nothing special. And this is just again, a calibration period at this point in time. So that's all I have. Thank you. 25:35 I don't know about you, but now this is a unofficial fireside chat F is far more important. 25:40 That's right. That's right. All eyes are on us. 25:42 Yes, indeed. So you mentioned a few slides ago about alternative credit data. Yes. And I was hoping that we could begin with that in regards to the significance within the automotive market, as well as if it's a viable option in power sports. 25:57 Yeah, yeah. So I'll say This TransUnion has been really pushing the envelope on alternative data. We felt that this was a whitespace opportunity. And we bought a company just a couple years ago, in 2015, called LTC linked to credit, which we've now rebranded as credit link. And they it is a repository of alternative data, much of the information that I've mentioned in one of my slides here. And we've been able to work with a number of different lenders in automotive, to test out the viability of the product and the lift that they're getting. And they're seeing great results from this, they're actually seeing that they can actually approved about 20 to 25% of the applicants who they wouldn't have approved prior. So huge, huge benefit and all that without necessarily exposing themselves to additional credit risk. So we're getting a lot of traction right now. I would say that we probably have the industry as a whole probably 30 to 40 different automotive lenders that are looking at alternative right now either have it in production or or testing it as we speak. 27:09 And now I've read that part of the appeal for that is, you know, thin filed borrowers who tend to be younger or in that millennial bracket. Do you think that is part of the reason for this drive? 27:21 Yeah, very much so. So prior to coming here, I actually talked to our our expert in alternative data and asked him what is the the breakdown of the 60 million consumers out there who have credit files but don't have enough information on their credit report to make their their credit history scorable, and majority of that is in the 18 to 25 year range. So mostly the magenta millennials, the younger millennials, it also includes immigrants who are looking to finance alone automotive vehicle and then You know, so huge benefits in the millennial space. Absolutely. 28:04 And how do their sort of financing behaviors differ compared to other generations? And has there been any kind of change lately? 28:11 Yeah, it's funny because we actually did a study TransUnion did a study and released some of the results back in August of this year. And if anyone is interested, I could I can share that with you. But we looked at millennials relative to Gen Xers, at the same time in which Gen Xers were the age of millennials. So it's an apples to apples comparison. And we looked at their behaviors across different assets. So we're different product types. We looked at personal loans, we looked at credit cards, we've looked at more women looked at auto and their activity, their lending activity and leasing activity is, is on par with Generation X, actually slightly higher about two to three percentage points higher in terms of activity, loan activity, so it's looking very positive for millennials least in the auto space. 28:55 Okay. And are there any patterns that have emerged lately, you know, across Cross all sorts of aspects of credit that has surprised you recently. You know, 29:04 it's it's very much what I what I kind of share with everyone here, which is that you're seeing the uptick in delinquencies and the the lenders being responsive by pulling back and being a little bit more conservative, particularly the subprime space. You know, we had seven years of consecutive growth in auto. And we've seen originations reaching all time highs, total balances exceeded $2 trillion in 2015, I believe it was so a huge record for for the finance industry as a whole. And, you know, we were seeing double digit growth in originations right after 2009 because of that pent up demand. It's starting to slow down a little bit. And I just think that there was a little bit of an over it was an over adjustment with regards to going into going deeper into subprime and they're pulling back a little bit right now, but not certainly not moving away entirely from it. 30:00 Sure. And do you have an idea about the outlook of credit performance for 2018? Or any insight for power sports specifically? 30:06 Yeah, so well, I'll say this, you know, a couple things. One is I think that the the trend that we see right now, now for this part of the year, I think it will kind of continue on into maybe q1 of next year. I think what the the blip will be around the hurricanes that we saw in in Florida and in Texas, we're seeing the the SAR peaking at 18.5 5 million vehicles, which is a record for the industry going back to July of 2005. Typically, you're seeing about 17 16 million, right, so an additional 2 million. So you know, there's going to have to be that replacement factor that comes into play in Houston and in Tampa, and Fort Myers and other areas that were impacted by the hurricane. So we'll see that probably continued through the rest of this year and maybe spillover into early next year. So that's It'll be great from origination standpoint. I think delinquencies will maybe climb a little bit more but I think as I said before the pullback is going to help because you're going to see a mix shift happening. More More origination is going to happen on the on the super prime and prime side. And so that'll mitigate and muffle some of that some of the exposure to subprime. 31:20 Okay, so on that kind of prime super prime topic, are you concerned at all that motorcycle originations are more concentrated in the subprime credit tier? 31:33 No, because I think that it's it's an opportunity for many the lenders and the dealers because with as they say, for the learnings from the auto industry, and the in the the fact that many of these lenders are embracing alternative data to get a better understanding of the consumers credit behavior, and purchasing behavior is going to be paramount in powersports over the next five or so years, okay, so I think that it's a great opportunity and it's the right timing as well. 32:00 Do you think powersports can push out terms as long as auto terms? Why or why not? 32:05 Well, I think it's you. I'll draw some parallels and auto. Okay. So you saw you saw a lot of the finance companies extending term out a four months, and that was fine just to get the payments in line with what the consumer can take. What we saw also was that so that doesn't, what that does is it, it prevents the consumer from eating into the principal earlier on, so their underwear a little bit longer, but what's exasperating that is the fact that you're seeing the underlying value of the vehicle coming down even more so than what was expected. Right. And so you're seeing the jaws opening of this. And in other studies out there, Edmonds is done a study with regards to the percentage of consumers who bring into trading, being on the water, and that's climbed over 30% right now, of consumers coming with a trade and so, you know, the concern is that, well, what do you do? Do you roll over the debt, the balance over to the next loan, and that's not something that's really viable right now. So you have to ask for more money down upfront. Or you can try to be more perfect by saying the next wave of originations need to be, you know, a little bit more scrutinized, right, the terms have to come back a little bit. Now, with regards to power sports, you know, I think there's something to be gleaned from that as well. You're talking about a smaller asset, in addition to that. So, you know, I, I, I, I'm not really sure exactly how that's gonna pan out there. But it'll be interesting to see if there are some learnings that have been taken from auto 33:29 Sure. And auto lenders are pulling back on nine nonprime. Should powersports lenders be tightening their underwriting as well? 33:38 You know, I think it's a little bit of it's a combination of both, okay, I wouldn't say blindly pull back, I think you need to use, you know, all the information, all the links that are at your disposal. So, you know, I'm a big proponent of alternative data because it's just provides the lender with more information on the consumer, right. And you can see there are a number of different applications for that because you Actually smooth out the process more. So when you have those conditional applications, having that additional information is very, very useful in terms of having a better deal experience and a better consumer experience as well. 34:10 Okay. And last question. Do you predict that motorcycle sales will fully recover? And if so, is there an idea of when? 34:20 Well, you know, this is unfortunately, not my area of expertise. So I'm going outside my comfort zone here, but I think that, you know, if there is more liquidity or more access to credit, I think it has it has definitely, there's a good reason for it to actually go and rebound to full extent. Sure. Yeah. 34:37 Yeah. Any final words or thoughts? 34:40 Oh, good. Thank you, everyone for having me. I really appreciate it and I look forward to talk to many of you. 34:44 Great, thank you so much. Before we go out to our last morning break, I wanted to thank our sponsors and speed leasing in particular, please take advantage of the exhibits next door. We will reconvene in about three 30 minutes. Thank you, everyone. [/toggle]

Industry Roundtable: Improving Lender-Dealer Relationships

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